THE VALUE
VIEW GOLD REPORTMONEYization
#17

MONEYization:The
global financial phenomenon of individuals and businesses moving
their funds to monies in which they have the highest confidence,
or money which has a higher store of faith.

Or, Understanding Up and Down

Direction is an essential parameter
that must be understood. Gold investors have the right direction
while paper asset groupies continue going off the wrong way.
Perhaps the fundamental problem is the education of so many of
today's professional money "managers." Being able to
turn on a computer does not make one a qualified investor. Apparently
though, that is perhaps the only skill required of so many of
those managing other people's money. Those comments may be somewhat
of a digression from our proper "direction," but that
is to be expected when trying to understand the "red or
black" betting that has replaced investment in today's world.
Perhaps the CFA should be replaced with the CRF, Certified Roulette
Forecaster. If you doubt this criticism, read some of the antics
in what is called correlation trading!

Knowing what is up and what
is down is part of understanding direction. The dollar value
of Gold tells us something about the direction of the dollar's
value. A lot of effort is expended trying to guess the direction,
trend, support, resistance for many purported measures of the
dollar's value. Simply looking at the dollar value of Gold gives
you the answer. Gold is the only near efficient market for the
pricing of national monies, and that includes the formally mighty
dollar.

The dollar price of Gold
also gives you the Gold price of a dollar. The meaning of that almost cute statement is
important, and should not be dismissed. Understanding this fundamental,
but simple, concept will help one understand the implications
of the economic and monetary policies that are influencing tomorrow's
value of your wealth. Gold's rising price in dollars, and a goodly
number of other national monies, indicates that the purchasing
power of fiat money is declining. Gold may be the only decent
statistic around for assessing and evaluating the purchasing
power of a national money.

With the exception of the mindless
twits that calculate the consumer price index for the United
States, the rest of us understand that such measures are nonsense.
Those measures fail to serve their intended functions. Rather
than providing a meaningful tool for understanding what is happening
to the purchasing power of the U.S. dollar, they are constructed
in some bizarre fashion that results in measuring nothing meaningful.
The Federal Reserve then goes a step further in the game of fantasy
statistics by excluding most of a consumer's needs, preferring
a measure that only includes "brussels sprouts and electronics."
Few of us spend most of our money on the fictional consumer basket
that the Federal Reserve uses to set policy. How many of you
decided not to buy gasoline last month, opting instead to buy
a flat screen television?

Coming to understand that
when $Gold is up the dollar is down is investment enlightenment. The dollar price of Gold also tells
us the Gold price of the dollar. Such is also true for any other
national money. For example, if Gold is trading at $400 per ounce
that value can be converted into how much Gold is necessary to
buy a single dollar. Simple take one(1) and divide it by 400.
That translates into 0.0025 ounces of Gold per dollar. $500 Gold,
likely this year, converts to 0.0020 ounces of Gold per dollar.
When the dollar price of Gold is rising, the Gold price of
the dollar is falling. The rest of the world will pay less
Gold for each dollar. The value of that dollar, in Gold the eternal
money, is going down. The most recent trend in the value of the
dollar is portrayed in the first graph. For those of you living
in other national monies, these rules likewise apply to your
money and Gold.

In that first graph is plotted
the Gold price of the dollar over the past couple of weeks. The
time period chosen is in particular post Katrina and pre Rita.
At first the dollar's value rose as the world was relieved that
New Orleans did not meet the dire fate most expected after listening
to the news media's storm coverage. Slowly the reality of the
situation became evident. The value of the dollar began to
slip. As is readily apparent in the graph, the value of the dollar
plunged to a low.

Why is the world appraising
the dollar's value in this way?First, the storm's damage is no trifling matter. A $200+
billion hole is a big hole, even for an economy as large as the
U.S. Wall Street gurus, afraid that people might wisely take
their money out of paper assets, have put a positive stroke on
Katrina. Many have concluded that Katrina is actually good for
the U.S. economy. No doubt some will be raving bulls over Rita.
Matter similar to that wisdom can also be found amongst the litter
in the cat box.

Second, the U.S. government clearly is determined to
raise the city of New Orleans above sea level by filling in the
hole with dollar bills. That approach might actually be cheaper
than whatever will really happen. We all know the U.S. government
does not have a spare $200 billion, or that needed for post Rita.
In the past year the U.S. deficit was about $600 billion. So,
the U.S. deficit will jump more than a third.

The problem is where they get
the money. Foreign investors already have more than $2 trillion
of U.S. government debt. Their appetite may be waning as we will
see later. If enough gullible foreign investors cannot be found,
the Federal Reserve will buy it. For some time the Federal
Reserve has avoided monetizing a significant portion of the U.S.
government deficit as foreign investors did it for them.
That time may be passing, and the markets realize that the Fed
Res monetizing debt means the value of the dollar should go down.
Markets like to discount the future ahead of time so the dollar
went down now. $Gold went to a new cycle high.

Global financial markets are
appraising the likely response of the Federal Reserve to the
events of the future. This appraisal is decidedly negative. Given
the historical performance of the Federal Reserve that response
is quite rational. The world may have been fooled with the first
bubble in stocks. People, though, adapt and learn from their
mistakes. The world is not being fooled by either the U.S. Mortgage
Bubble or the massive deficit looming at the federal level. Given
the near total politically oriented policies of the past on the
part of the Federal Reserve, holding dollars is not judged to
be a good idea. If the rest of the world realizes that, why
are you still holding so many?

The second graph portrays the
Gold value of the U.S. dollar over the last ten years. For those
relatively new to Gold, the peak in that value came in 1999.
That was the year when several European central banks realized
that selling Gold and buying U.S. debt was a really dumb idea.
They could see the bubble at work in the U.S. stock market even
if the Federal Reserve could not. Those banks may have continued
to buy U.S. debt, but they did not do so with money from selling
Gold. That event marked the top in the value for the U.S. dollar.

$Gold is at a new cycle
high because the value of the U.S. dollar is at a new cycle low. That understanding is fundamental
to your wealth's well being. If you still own dollar denominated
equities the purchasing power of that wealth has gone down. Ok,
so your portfolio is up some in the past year. What it will buy
though has declined. The value of the dollars it represents is
less. You are not making "money," you are losing purchasing
power. Do not be deluded by the illusion of wealth in paper!

Many investors are now developing
an interest in Gold, and that is good. This response though must
include more than buying Gold with idle dollars. While that action
does improve your overall financial defenses, the paper assets
you retain are still vulnerable. 10% of your portfolio in Gold
is certainly better than no Gold in your portfolio. However if
that means that 90% of your wealth is still in dollars, little
has been done to alter your risk portfolio. A now popular concept
is Value At Risk(VAR). With 90% of your wealth in dollar assets,
your VAR is still in the wrong direction. You need to reduce
your holdings of dollar assets and buy $Gold.

As mentioned earlier, for some
time the Federal Reserve has not had to materially monetize the
deficit of the U.S. government by buying that debt. Foreign investors
have been quite willing to do so. That appetite continues
to wane, as shown in the third graph. Plotted is the year-to-year
change in the holdings at the Federal Reserve of U.S. debt by
foreign official institutions, which comes from the Fed's weekly
report. The trend in that buying is fairly obvious. Foreign
central banks are buying less U.S. government debt. That
leaves only two buyers to fill the gap, the Federal Reserve and
the Social Security System.

Imagine the discussions in
the central banks around the world. Their economists and other
wise staffers have been recommending selling Gold and buying
dollar denominated debt. Being wrong is not hard to do. Being
that wrong really takes some special skills! How will the
boards of these institutions response? If you were one of the
directors of a central bank, how would you respond to a recommendation
to sell Gold and buy more U.S. dollar debt?

We are witnessing in the dramatic
rally of dollar Gold the moneyization phenomenon. Investors,
institutions, and consumers around the world are turning away
from the dollar, and other national monies. They are seeking
security in the single form of money which history as shown as
more reliable than all governments, Gold. Those that have over
the years remained loyal to Gold have been referred to in rather
disparaging manners, often called Gold Bugs. Well, the Gold
Bugs have been right as shown in the fourth chart. The Paper
Asset Nuts are the ones that have been wrong, and need a serious
reality check. This graph might be a good one to send to
your investment advisor if they still have your portfolio mired
in stock mutual fund goo while you are being charged exorbitant
fees.

That all said and while the
long-term case for dollar Gold is solid, every day does not necessarily
present the best time to buy. As the last chart shows, good times
to buy Gold do develop. Times also exist when holding and watching
are wisest action. Dollar Gold is seriously over bought as
a result of the storm surges, and a correction can be expected.
What is not known is whether the correction will come from $475
or $500. Gold belongs in your portfolio, and you should be
preparing cash to invest in Gold at the next buy signal.
$1,300 Gold is in our future, and you should have part of that
gain in your portfolio.

A final comment for those
readers involved in defined benefit plans at your place of employment. If your plan does not include a Gold
"bucket," the time has arrived to start complaining
to your human resource department. No longer is it necessary,
given all the alternatives for buying Gold and Silver, to restrict
the investment options to paper assets. The principal reason
for such restrictions are tradition and those massive fees and
commissions paid to consultants, managers and mutual fund companies.
It is YOUR retirement, and you may want it to have some purchasing
power when you retire. Otherwise, enjoy whatever your social
security check will buy. Recommend e-mailing this article
to all of your human resource staff.

Ned welcomes
your comments and questions, and tries to answer most all. His
mission in life is to rescue investors from the abyss of financial
assets and the coming collapse of the U.S. dollar. He can be contacted
at nwschmidt@earthlink.net